U.S. stocks top BRICs by most ever on emerging market flight

Investors are favoring U.S. stocks over emerging markets by the most ever as fund flows and volatility measures show institutions are increasingly seeking the relative safety of American equities.

Almost $95 billion was poured into exchange-traded funds of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index trades at 16 times profit, 70% more than the MSCI Emerging Markets Index. A measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.

Cash is draining from emerging-market ETFs and flowing into U.S. stock funds at the fastest rate on record as bulls say an unprecedented third year of higher earnings growth will support the S&P 500 even as the Federal Reserve begins to remove stimulus. Developing-nation investors say the ETFs will lure more cash after equity valuations reached a four-year low.

“The weakness in emerging markets and the associated economic troubles have encouraged some investors to reallocate from the emerging world to the U.S.,” James Gaul, a fund manager at Boston Advisors LLC, which oversees about $2.3 billion from Boston, said by phone on Aug. 15. “The U.S. is seen as the most stable economy at the moment, and the equity market is viewed as having better prospects than the rest of the world.”

ETF Deposits

The S&P 500 slid 2.1% to 1,655.83 last week, paring its gain this year to 16%, as data on rising retail sales, subdued inflation and a drop in jobless claims fueled speculation the Fed will cut monetary stimulus, known as quantitative easing. The central bank will probably reduce the $85 billion in monthly bond purchases next month, according to 65% of economists surveyed by Bloomberg. The S&P 500 fell 0.1% at 9:35 a.m. in New York.

Brazil and South Africa led developing nations higher last week, driving the MSCI index up 0.7% for the first advance since July. The equity gauge dropped 1.4% today, extending its decline for the year to 10%.

Investors have sent cash to U.S. equity ETFs every month since November, with deposits totaling $32 billion in July, the most since September 2008, according to data compiled by Bloomberg from about 1,500 funds. There have been withdrawals from emerging-market stock ETFs in five of the past six months, on pace for the biggest annual outflow since Bloomberg began tracking the data in 2000.